Private Companies Q4 investment update

As with any investment, your capital is at risk. Past performance is not a guide to future returns.

Brian Kelly (BK): Baillie Gifford has been investing in growth for the last century. Less well known is that we've been investing in private growth companies since 2012.  I'm Brian Kelly, an investment specialist supporting the private growth business at Baillie Gifford. I'm joined today by Peter Singlehurst, head of the private growth business and firm partner.

We'd like to talk today about the opportunity that we saw that got us set down the path to build a private growth business, a little bit about what happened in 2022 and 2023 in the private growth markets, and then wrap up with some opportunities we're excited about going forward.

So, to begin, let's talk about the opportunity that you saw back in 2012, 2014, that set you down the path to build out a private growth business at Baillie Gifford.

Peter Singlehurst (PS): What we saw back in 2012 and 2014 was a change in how capital was being formed in businesses and how innovation was being financed. Historically, companies would raise money from venture capital investors. They would be the owners of those businesses for a few years, but not more. And then those companies would enter the public markets, often as very small businesses. Amazon had a market cap of $450 million when it IPO-ed. But this started to change over the first half of the last decade, and companies started staying private longer. Back then, it was companies like Airbnb, like Spotify, like Alibaba.

And as we saw this change happen, two things struck us. The first was that the companies that we had always owned were no longer public businesses. They were to be found in the private markets, companies that were doing $100 million or a billion dollars of revenue. These were now private businesses rather than public businesses. But also, we believe that companies would be able to build themselves more effectively by virtue of staying private longer because they could remain focused on their operations and their growth without having to deal with the bright lights and the rigmaroles of the public markets.

And so, we saw an opportunity to invest in companies that were the same sort of businesses that we'd always invested in, that might well just be better businesses by virtue of staying private longer. And then we would be helping our clients by giving them access to these companies which they were otherwise really struggling to get access to as they stayed private for longer.

BK: Interesting. So we saw this thesis take hold and the market did really well, with a lot of participants embracing this thesis in 2019 to 2022. In 2022 and 23, it seemed like the growth equity, private growth, stalled a bit. Capital markets shut off. There were a few funding rounds. The companies that got successful funding rounds were raising at down rounds, so lower than their previous high valuation. And there were almost no initial public offerings. What does that tell us about the thesis and is it an end of an era or is it the beginning of something new?

PS: I think it's really important to disentangle the structural changes from the cyclical changes that are happening within that structural change. So, the trend of companies staying private longer remains fully intact. If anything, it is accentuating, and companies are continuing to stay private even longer. But there has without a doubt been a capital cycle that has happened within that broader structural change.

I think to understand what happened in 2022 and 23, you first need to understand what happened in 2020 and 2021. An abundance of capital within the market led to two phenomena. The first was companies just had too much money, and they overspent, and they built out cost bases that were too high. And reduced, as a result of that, the returns that they were making on the equity that they were investing in their businesses. Simply put, they just were worse businesses by virtue of being over-capitalised.

And then at the same time, valuations were too high because there was too much money chasing not enough good opportunities. What happened in 2022 and 2023 was that there was a reset. A reset which I believe we will look back on and actually view as very important and very healthy. A lot of companies have gone through a painful but important transition over the last couple of years. Many of them have really reduced their cost bases.

And of course, layoffs have been well publicised, but what's less obvious to the outside world is the much greater discipline that we're seeing within cost bases within businesses, in their marketing spend, in their opex spaces. And we're also seeing greater leverage over those cost spaces as a result of continued growth.  I think a business like Chime, the neobank in the US, is a great example of a business that's been through that transition and is emerging as a much better and stronger business.

And then at the same time we've seen valuations reset. And in many cases today we're actually able to invest in companies in the private markets that are growing faster than their public market peers, in some cases many times faster than their public peers. And we're able to invest in those companies at discounts relative to public companies. So we're seeing, within the private growth stage markets today, better businesses that have been through difficult periods and are coming out stronger, but we're also seeing really great prices. Business like Stripe, for instance, which trades at a discount to its public market peers and is growing faster.

BK: That's great. So leaner and stronger is the exit from that period. During the time from 2022 and 23, where there weren't a lot of funding rounds, what were some of the things the team was focused on to prepare for 2024, 25, and beyond?

PS: We really pulled back on deployment in 2022. I wish we'd pulled back earlier, but I think we pulled back a lot earlier than most. But we remained very busy in that period. We've continued to grow the team, invest in team members, and bring in additional team members. We've really built out our value-added capability for our companies, and that's something that we're very excited about as a team. And then we really bided our time and waited until we would see not just good businesses, but good businesses at good prices. And that really started in 2024. We started to find companies that had been through these difficult periods, were still growing, but had got better control of their cost base. And we were seeing these companies at really great prices.

So over the course of 2024, as a team, we met with over 1,000 companies. We looked at over 600 private financing rounds. We did about 60 or so first cuts of our diligence process. We call it our one-pager process. We did about 30 deep dives into companies. We call that our 10 questions framework. And that resulted in about 11 new investments.

To contextualize that, 11 investments is what we made in the total of 2022 and 2023 combined. And we made that number of investments alone in 2024. So that time period, since 2020, at the end of 2021, has been a period of investment and growth for us as a team, a period of biding our time, keeping our powder dry. And then as we've seen great opportunities, we've stepped up our pace of deployment.

BK: Great segue. Let's talk a little bit about an opportunity that you're excited about and the team's excited about today.

PS: I think SpaceX continues to be one of our highest conviction holdings. It's a company that has an enormous market opportunity, not just in the launch business, but in the form of Starlink. It has a truly differentiated product, and it has one of the most robust competitive advantages that I've ever seen in a company.

To give you some stats on that competitive advantage, SpaceX launched 134 rockets last year. They'll probably launch about 200 rockets this year. An organization that's often held up as a competitor for them would be the United Launch Alliance. They launched five rockets last year. The bedrock of their competitive advantage is lower cost of launch. And often when we talk about cost advantages for companies as competitive advantage, we might measure it in percentages. They're x percentage better than their competitors. For SpaceX, you have to measure their cost advantage in orders of magnitude.

Their launch business provides a very stable revenue base for the company. Starlink continues to grow very quickly. It's publicly announced that they have over 4 million subscribers. And as a rule of thumb for this business, every million subscribers add about a billion dollars of revenue. And then because this is a very high fixed cost, low variable cost business, you have very high fall through revenue to profit on those incremental subscribers.

So, it's a business that has a very large market opportunity, a large and growing revenue base, and then very compelling profitability dynamics within the company. So, even at the valuation that it's currently at, about $350 billion, we first invested at about a $30 billion valuation, we still see substantial room for growth in the value of SpaceX as an investment.

BK: As a last question, let's think bigger picture. What gets you excited about private growth today and your outlook going forward?

PS: I think the outlook for the private growth markets has never been so compelling. When you think about what you need to make great investments, you really kind of need three things. You need a great product, you need a great business model built around that product, and then you need a great price so that you can make money on the investment that you've made.

If you think about things from the product side, there have never been so many early-stage companies trying, innovating, to create new and compelling products. As growth stage investors, we don't have to get involved in that. We can let the early-stage companies practice, innovate, try, throw spaghetti at the wall. And then we get to see what works. So, the pool that we're fishing in for businesses with great products has never been bigger.

A good product isn't good enough. You also then need that good product to be manifest in an exceptional business model. And we think that we're operating within an environment that has the ingredients for great business model creation. You have companies that are operating with enough capital, but not so much capital that they get swamped. And you have more experienced entrepreneurs and business leaders than there ever have been. So, the human capital environment is very rich as well.

And then at the same time, there has been a real reset in prices and valuations post-2022. So, we see the ingredients for exceptional investments over the coming years. We see great products. We see those products manifesting great business models. And then we see very compelling prices to be investing in these companies. So, we think the outlook for private growth from here is very exciting.

BK: Thank you. And Peter, thanks for joining us today to revisit a bit of the history of our private growth business and some of the outlook going forward. We're excited about the private growth opportunity going forward. The long-term thesis is intact. The 2022 and 2023 sell-off only helped companies emerge leaner and stronger. There's a cohort of companies, both small and as well as some mega cap market leaders like SpaceX, that keeps the team excited. If there's any questions that you have or that we can answer or you'd like to learn more, please reach out to your client contact and we'd love to talk more about the private growth strategy.

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This communication was produced and approved in January 2025 and has not been updated subsequently. It represents views held at the time and may not reflect current thinking.

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